Canada: Dividend Gross-Up and Dividend Tax Credits

Last Updated: February 14 2018

Tax Integration in Canada

A key concept in Canadian tax law is the idea of tax integration. Essentially, tax integration tries to achieve a similar total tax rate for a particular stream of income once it reaches the individual taxpayer level. What that means is that whether a particular income stream is earned directly by an individual as a sole proprietor or whether the income was earned by a corporation and then paid out to the individual as a salary or dividend, the ultimate aggregate tax rate on that income should be approximately the same. Where an individual earns the income directly, he simply pays tax at his personal marginal tax rate. Where a corporation earns the income and pays it to the individual as a salary, the corporation can deduct that salary as an expense, and thus pays no tax on that amount, and the individual again pays tax at his personal marginal tax rate. The situation becomes more complicated is when a corporation pays its shareholders with dividends. Dividends are paid from a corporation’s after tax profits, meaning that the corporation would have already paid corporate income tax on that income. If the individual receiving the dividend income then paid tax at his full marginal tax rate on that income, that income stream would be subject to double taxation. In order to alleviate this problem and achieve tax integration, the Canadian income tax system utilizes a dividend gross-up and a dividend tax credit mechanism that takes into account the corporate tax that has already been paid. This is accomplished by reducing the amount of tax the individual pays on that dividend such that the total taxes paid would be roughly the same as if that dividend had instead been earned directly or as a salary.

The Dividend Gross-Up

The function of the dividend gross-up and related dividend tax credit is to account for the portion of tax that a corporation has already paid on a stream of income before the dividend is paid. The basic federal tax rate for corporations in Canada is 38%, but after the federal tax abatement of 10% and general tax reduction of 13%, it is reduced to 15%; furthermore, for Canadian-Controlled Private Corporations (CCPCs) earning active business income, the small business deduction is also available, which lowers the federal corporate tax rate to 10% as of 2018.

The federal tax abatement applies where the corporation pays provincial tax and essentially provides room for each province to set their corporate tax rate. Each province has its own tax rates for CCPCs and non-CCPCs, with Ontario’s combined federal and provincial tax rate for CCPCs being 13.5% and 26.5% for non-CCPCS. In order to reconcile the difference in tax paid at the corporate level, dividends are differentiated into eligible and non-eligible dividends. Eligible dividends are those issued by non-CCPCs and are taxed at a lower rate than non-eligible dividends which are issued by CCPCs. This is specifically achieved by having a different dividend gross-up rate and a different dividend tax credit rate for eligible and non-eligible dividends.

The dividend gross-up functions by approximating the amount of income a corporation would have had to have earned in order to issue a particular dividend. For example, if an individual receives a dividend of $100 from a non-CCPC – that $100 would have already been subjected to the basic federal corporate tax of 38%.Thus, the base amount of income that needed to be earned in order to issue a $100 dividend would have been $138 and so the dividend gross-up for eligible dividends is 38%. Accordingly, the individual who received the $100 dividend would then need to report $138 on his tax return for that year (the dividend plus the gross-up). For an individual who receives a non-eligible dividend from a CCPC, the corresponding amount of dividend gross-up would be 16% in 2018, so an individual receiving a $100 non-eligible dividend would then report $116 of income on his tax return for that year.




Dividend Issued






Amount Included in Income



The Dividend Tax Credit

However, to account for the tax that the corporation issuing the dividend has already paid, the individual receiving the dividend is then entitled to both a federal and provincial dividend tax credit. The federal dividend tax credit for an eligible dividend is 15.02% of the grossed up dividend and the Ontario dividend tax credit for an eligible dividend is 10% of the grossed up dividend both of which would negate that amount of tax owing from the individual after their final tax owed for the year is calculated. For a $100 dividend received with a grossed-up value of $138, the combined federal/Ontario dividend tax credit would be $34.53. The top combined federal/Ontario marginal tax rate for individuals is 53.53% for those earning over $220,000 per annum, which means an individual in that bracket who earns $100 of eligible dividends would owe $73.87 (53.53% of $138), but with the dividend tax credit taken into account, would only owe $39.34. Effectively, the individual would have only paid a 39.34% tax rate on the $100 dividend.

Because the dividend gross-up is 38% regardless of the actual tax rate of the corporation (which varies due to the different provincial corporate tax rates), tax integration will be imperfect. In order to issue a $100 dividend in Ontario, an Ontario non-CCPC would have had to earn $136.05 before tax (26.5% tax on $136.05 is $36.05; $136.05-$36.05=$100). As such, the corporation would have paid $36.05 in tax and the individual would have paid $39.34 in tax for a total of $75.39, which is an effective tax rate of 55.54% - a rate slightly higher, but almost equivalent to the top marginal personal tax rate in Ontario of 53.53%.

The federal dividend tax credit for a non-eligible dividend is 10.03% and the Ontario dividend tax credit for a non-eligible dividend is 3.12%. As such, an individual would receive a combined federal/Ontario dividend tax credit of $15.25 on a $100 non-eligible dividend. Going through the same exercise as above, this would mean that an individual at the top marginal tax rate in Ontario would have taxes owing of $62.09 on the $100 non-eligible dividend, but accounting for the $15.25 dividend tax credit, would need to pay $46.84, an effective tax rate of 46.84%. When considering the combined amount of tax actually paid on the income stream that resulted in the $100 non-eligible dividend, $115.61 would need to be earned by a CCPC in Ontario in order to issue a $100 dividend, resulting in $15.61 of corporate tax and $47.84 of personal tax for a combined total of $63.45 of tax paid on $115.61 of income, or an effective tax rate of 54.70% - a rate slightly higher than the top marginal personal tax rate in Ontario and slightly lower than the effective rate of tax on eligible dividends, but again roughly equivalent to both. Our top Toronto tax firm can help individuals and corporations structure their affairs in the most efficient way possible.




Dividend Issued



Grossed-Up Dividend (%)

$138 (38%)

$116 (16%)

Top Personal Marginal Tax Rate



Tax Owed on Dividend



Combined Federal/Ontario Dividend Tax Credit (%)

$34.53 (25.02%)

$15.25 (13.15%)

Final Tax Owing



Effective Tax Rate on Dividend



Combined Corporate/Personal Total Tax Rate



Tax Tip – Tax Free Dividends for Income Below $42,000

Due to the way the dividend tax credit functions, individuals who have lower marginal tax rates receive a comparatively bigger benefit from earning income through dividends than individuals with higher marginal tax rates from corporations that they do not control. To illustrate this, consider an individual in Ontario who earns $42,202 and has a combined federal/Ontario marginal tax rate of 24.15%. That individual receives a $100 eligible dividend. The dividend is grossed-up as above and the dividend tax credit that he receives is similarly $34.53. The individual similarly calculates the amount of tax he would owe based on his marginal tax rate of 24.15% on the grossed up amount of $138 which results in taxes owed of $33.33. After accounting for the dividend tax credit, the government actually owes that individual $1.20 which, while non-refundable, can be credited against the tax he owes for the other income that he earned. On the other hand, in the earlier example, an individual with a top marginal combined tax rate earning a $100 eligible dividend would pay 39.34%. As such, the individual with the 24.15% marginal tax rate has a 24.96% lower tax rate on an eligible dividend than his regular income while the individual with the top marginal tax rate of 53.53% has only a 14.19% lower tax rate on eligible dividends than on his regular income. For non-eligible dividends, the tax free cut off is much lower, at only $10,354, so this type of planning may not be as beneficial. This is only relevant where the individual receiving the dividend does not own the corporation and is indifferent to the amount of tax the corporation itself paid, as integration ensures that the combined tax rate of the corporation and the individual is similar to the individual’s personal tax rate. Speak to one of our experienced Toronto tax lawyers and optimize the way you receive your income.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Labour and Employment
Intellectual Property
More Advice Centers
Useful Resources
Forms available to download for income tax filing in Canada.
Hear David J. Rotfleisch discuss timely and highly topical tax matters during appearances and interviews with specialist publications.
Useful explanatory videos of income tax matters.
The following questions and answers are based on the proposed measures that were announced on December 7, 2015.
The official Government website of the CRA.
This guide is for any person who deals with the Canada Revenue Agency (CRA). The guide gives you information on the 16 rights set out in the Taxpayer Bill of Rights and explains what you can do if you believe that the CRA has not respected your rights.
The Office of the Taxpayers' Ombudsman (OTO) works to enhance the Canada Revenue Agency's (CRA) accountability in its service to, and treatment of, taxpayers and benefit recipients through independent and impartial reviews of service-related complaints and systemic issues.
Ontario personal income tax is an annual tax collected from individuals who are Ontario residents on the last day of the tax year or have income earned in Ontario for the tax year.
The following documents provide instructions for filing your 2015 income tax return.
If you earned income in B.C. or operated a Corporation with a permanent establishment in B.C. last year you need to file an income tax return. Find out when you need to file your income tax return, and if any tax credits or rebates apply to you.
Generally, a corporation must file an Alberta corporate income tax return (AT1) for each taxation year during which it has a permanent establishment in Alberta.
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions